When my local credit union merged with another one a few months ago, it upgraded all of its automated teller machines to ones made by Diebold (NYSE:DBD). I was impressed with the solidity of the machine and the security features it offered, including mirrors (which allow the user to check for "shoulder surfers") and recessed keypads. The prior machines had seemed, well, flimsy, which is not a feature you want in an ATM.
With this impressive new machine in mind, I thought to research Diebold as a possible investment. What I found was disappointing. As fellow Fool Stephen Simpson reported last month, the company's second-quarter results were less than impressive, with earnings coming in 24% lower than last year even as ATM sales were 12% higher and overall sales were up 15% from the same period.
This is not just a problem with Diebold: Competitor NCR (NYSE:NCR) also is contending with ATM revenues that dropped 20% year-over-year. But Diebold's product mix -- primarily voting machines -- leaned toward products with lower margins and toward sales to international customers.
Even though Diebold is expecting election-systems revenue to grow anywhere from 7% to 38%, that might just be wishful thinking. A test of the TSx electronic voting machines in California the other day revealed major problems: The touch screens froze, printers jammed, and systems crashed. Because the software running on the machines is based on Microsoft's (NASDAQ:MSFT) Windows operating system, the so-called "blue screen of death" was not unfamiliar to those witnessing the problems. Competitors such as privately held Election Systems & Services and Sequoia Voting Systems now have an opportunity to move in where Diebold was previously thought to have a lock on contracts. California has since denied the company certification to supply voting machines.
Diebold has pointed to the 2002 Help America Vote Act that was passed in the wake of the 2000 Florida presidential election debacle as an impetus for future growth. But these latest testing results are a major stumbling block. Diebold already has two strikes against it after CEO Walden O'Dell openly promised to deliver votes to President Bush in 2003 and lawsuits alleged that software security was inadequate. It can't afford a third strike. Although Diebold plans to fix the problems with its TSx machines, the damage may already have been done: Rejection of the TSx in California could influence other states to do the same.
What Diebold does have going for it is a 51-year history of consecutive increases in the dividend -- which now stands at $0.82 per share -- that it pays to shareholders. There are few other companies with a similar track record. Yet with a steady decline in free cash flow, a price-to-earnings ratio equal to the market's, and declining earnings from its primary line of business, I'd be hard-pressed to invest in it at this time, regardless of how pretty its ATMs look at my bank.
Related Foolishness:
- Excuses seem to follow Diebold's quarterly announcements.
- When will it be able to produce bold growth?
- Diebold's voting machines showed promise at one time.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.
